A leading voice in the international central bank digital currency (CBDC) dialogue, fintech consultant and author of Cashless, Richard Turrin has spent over a decade working in the financial technology industry in China and APAC and brings a unique perspective to his analysis of the diverging approaches being taken to CBDC strategy and adoption.

On the publication of Cashless, Federico Torreti, head of products, Amazon, stated that Turrin “captures how digital currency can spin the flywheel for China’s new digital trade platforms. He shows how trade partners not only gain access to digital currency, but likewise to new digital services.”

In efforts to decipher the backlash brought about by the US Federal Reserve’s paper ‘Money and Payments: The U.S. Dollar in the Age of Digital Transformation’ released on January 20, 2022, Turrin says that he remains as ‘thoroughly disgusted’ by the paper today as he did upon his first reading.

“In fact, it reads like a high school book report.” The paper has seen widespread criticism from payments experts and CBDC enthusiasts for its lacklustre approach to setting basic principles for how it envisions a digital dollar.

Turrin explains that most of the questions posed at the end of the paper have already been asked and answered in the public forum. He refers to the list of questions in the report as a call for comment on what is effectively a complete list of CBDC design parameters.

“The BIS, the PBOC, the Bank of Canada, the European Bank, the Riksbank, have all written extensively about these things, yet the Fed is posing questions as though they are new and novel.”

Turrin views this a “disingenuous” tactic by the Fed whose specialists are more than capable of answering any and all the questions presented, furthering that the purpose of their inclusion was not to promote dialogue or flag potential risks, but as a “gift to the banks.”

Giving banks another platform to respond to questions along the lines of ‘will CBDC disrupt the banking system?’ will simply draw out the process over concerns which have already been debunked.

“This will set us back. The US is effectively going to reopen discussions or start these discussions from a very elementary perspective, when there is already ample research produced by the likes of the BIS and others to draw on.”

Design by committee

The paper solicits feedback from the public and industry by May 20, 2022, focused on the benefits, risks, design, and policy considerations of a potential CBDC.

Turrin explains that it is natural for the introduction of a new technology such as a CBDC to bring a disruptive influence on incumbent institutions, which in this case includes banks and credit card companies. However, while it is correct to involve these institutions in the design of a CBDC, he notes that it is essential that the Fed actively grapples with the “new digital payment world”, rather than pandering to the current monopolies held by banks and credit card companies.

“A central bank digital currency fundamentally disintermediates payments from these organisations. Therefore, including them is just, but at the same time, we can’t expect them to be happy about building a digital currency.”

In this sense, design by committee would prove a problematic strategy.

A crisis of vision

The Fed’s seeming lack of recognition of what the future looks like for digital payments and therefore CBDCs, is the largest concern within the paper, continues Turrin.

The report was crafted with an old-world view of payments, he laments, but “what will payments look like 15-20 years in the future? We’re no longer looking at a world where it's Visa and MasterCard, consumers will be paying directly without the costs imposed by intermediaries.”

This new world of digital payments will be “when machines pay” in the same way that we’re just now starting to see China harness 5G, IoT and blockchain smart contracts to automate business payments.  We’re going to need the same capabilities yet smart contracts aren’t even mentioned by the Fed while they are already built into the digital yuan.“Everyone knows that we are getting progressively more digital. The fact that the Fed doesn't recognise this future, where CBDCs are about far more than replacing Apple Pay, Google Pay, or cards, is beyond me.”

He suggests that the key reason that the Fed appears to be resisting CBDC, is that it fundamentally believes the existing payment system in the United States is state of the art, and there is no space, nor any need for improvement. But in reality, “any expat living in China who lives with WeChat and AliPay knows that there is a better system available, and the system can be replicated, or it can be improved.”

This crisis of vision as to what payments can be is “very much based on the Fed’s inability to change or disrupt the incumbents.”

“Sadly, the Federal Reserve is tasked with looking out after the citizens of America to ensure that they have the most modern payment mechanisms possible. In reality, they are looking out for incumbent institutions above the needs of the citizens for whom they meant to serve.”

Connecting identity verification with financial inclusion

Turrin underscores the potential the CBDC holds to increase financial inclusion, criticising the Fed’s approach to identity verification.

The correlation between paper-based, traditional identification and onboarding models and financial exclusion is well understood and widely accepted. The potential that digital models hold with respect to improving the largely unbanked or underbanked portions of the US population is also understood.

The Fed’s paper, Turrin notes, makes a critical error by looking to the past and using outdated banks’ approaches to identification rather than framing this with a forward-looking view.

The paper reads: “In practice, this would mean that a CBDC intermediary would need to verify the identity of a person accessing CBDC, just as banks and other financial institutions currently verify the identities of their customers.”

Turrin believes that even a low level or basic CBDC wallet would allow the underbanked or unbanked to gain access to the financial system without ever need to walk into a bank – this could go a long way toward reducing the 18% of US citizens who are unbanked or underbanked.

Brainard’s light at the end of the tunnel

In a speech to the US Monetary Forum on February 18, 2022, Federal Reserve Governor Lael Brainard struck a more supportive tone toward the exploration of CBDC, in contrast to the Reserve’s January paper.

With her remark:  “With technology driving profound change, it is important we prepare for the financial system of the future and not limit our thinking to the financial system of today,” Brainard actively calls out the apathetic or dawdling approach being taken by other Fed governors.

She adds: “It is essential that policymakers, including the Federal Reserve, plan for the future of the payment system and consider the full range of possible options to bring forward the potential benefits of new technologies, while safeguarding stability […] Responsible innovation has the potential to increase financial inclusion and efficiency and to lower costs within guardrails that protect consumers and investors and safeguard financial stability.”

Brainard notes that it is only prudent to consider how the potential absence or issuance of a US CBDC could affect the use of the dollar in payments globally in future states where one or more major foreign currencies are issued in CBDC form.

Turrin agrees with Brainard’s observations and praises her vision of the future, arguing that not having a digital dollar can only put the US at a disadvantage, “it’s not rocket science, but no-one told Powell.”